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Answers to the questions in Quiz 3:

1&2.
 Definition of Absolute advantage: the comparison among producers of a good according
to their productivity.

 Definition of Comparative Advantage: the comparison among producers of a good


according to their opportunity cost.

 A person can have an absolute advantage in producing all goods. However, a person
cannot have a comparative advantage in producing all goods. Accordingly, comparative
advantage is more important in explaining gains from trades.

3. With specialization (when everyone is producing at lower opportunity cost), the total amount
of goods and services produced (from the same amount of resources) will increase.

4. The principle of comparative advantage suggests that each good should be produced by the
person who has a lower opportunity cost in producing that good (that is, the person who can
produce the good at a lower opportunity cost should specialize in producing that good). With
specialization, the total amount of goods and services produced will be higher. Since everyone is
producing the goods at a lower opportunity cost, they are willing to trade them at lower prices.
This means that everyone will have more of the goods and services to consume.

5 through 9:

Hours needed to make 1 Amount produced Opportunity cost making 1


unit of in 40 hours unit of

Food Clothing Food Clothing Food Clothing

Country A 2 hours 5 hours 20 units 8 units 0.4 unit of 2.5 units of


clothing food
Country B 4 hours 8 hours 10 units 5 units 0.5 unit of 2 units of
clothing food

5. Country A; absolute,
6. Country A; absolute,
7. Country A; comparative,
8. Country B; comparative,
9. Country A; country B

10. Exports: goods produced domestically and sold abroad.


Imports: goods produced abroad and sold domestically.